Banks waive overdraft fees. Should they be doing more?
Banks did not hesitate last month to waive overdraft fees when the coronavirus pandemic capsized the national economy and put tens of millions of people out of work and in severe financial distress.
Today, as the fight continues, a growing number of voices are calling on banks (with the help of their regulators) to go further by making creative use of overdraft programs and other small lines of credit like way to get money into the hands of cash-strapped consumers and businesses as quickly as possible.
Citizens Bank of Edmond, a $ 300 million asset lender in Oklahoma, has already created an interest-free overdraft line that customers repay when they receive checks from the federal government’s $ 2 trillion coronavirus relief bill. But CEO Jill Castilla says more needs to be done, especially creating a federally backed overdraft line of credit program to reduce bank risk.
“It’s the fastest way for borrowers – consumers and businesses – to access credit,” said Castilla, who is also a board member of the American Bankers Association. “This is something that has never been done before… using lines in a more substantial way to raise funds.”
Overall, banks have not significantly changed their overdraft programs in the wake of the COVID-19 crisis and the resulting economic fallout. Sure, they want to help their clients – most waive overdraft fees automatically or on demand – but so far there has been no permanent change.
That may soon change as lawmakers continue to pressure banks to reduce overdraft fees in favor of ‘reasonably priced’ short lines of credit, and five leading regulators are calling on financial institutions providing small dollar “responsible” loans to consumers and small businesses.
Add to that an increase in unemployment across the country and another round of government paycheck protection program glitches, and it’s no wonder that bankers, economists, political experts and even billionaire investor and entrepreneur Mark Cuban are pioneering ideas for emergency credit programs in times of financial crisis.
It remains to be seen exactly which suggestions might stick, but there are several to ponder.
One of the first ideas to emerge in this crisis came from economist Arnold Kling, who outlined his idea for a national line of credit in a blog post from March 22. Citing a liquidity crisis, Kling suggests that banks add a low-interest line of credit, backed by the Federal Reserve, to every personal and business bank account in the country.
“We need outside liquidity,” Kling wrote. “We need to ensure the liquidity of the non-financial sector and believe that it will take care of the banks, rather than trying to do it the other way around.”
Those who would need it would be “individuals and businesses temporarily strapped for energy who expect to get back on their feet once things get back to normal,” Kling said. Those who don’t need it won’t use it, he said.
But economist G. Michael Moebs of Moebs Services says the Fed doesn’t need to be involved at all. According to Moebs, there are $ 46.1 billion in unused overdraft limits that could be tapped into immediately instead of waiting for the government to send relief checks to individuals and coordinate financial aid programs like the P3 for individuals. workers or the Main Street Loan Program for Businesses.
So what does it take? A decrease in overdraft fees – either a temporary suspension of overdraft fees to zero or a price reduction in half to about $ 15 per overdraft, Moebs said. This would significantly increase bank commission income, but banks would have to get used to the idea of unsecured credit, he said.
“Unsecured credit is not very well understood… but it can be very profitable if both the price and the provision are done correctly,” Moebs said. “Any [overdraft fee] of $ 20 or more is false and [overdraft] the $ 500 limits for everyone are bogus.
The Small Business Administration-run paycheck program, which fuels the most recent brainstorming sessions, offers businesses with 500 or fewer employees loans of up to $ 10 million that can be canceled if borrowers spend the funds for payroll and other necessities. Critics say it is inefficient, poorly structured for smaller businesses, and difficult to access. On Monday, when the second round of financing became available, many banks struggled to file loan applications for their customers.
Cuban, a small business expert, is offer an alternative to PPP. Dallas Mavericks Basketball Team Owner Offers Special Small Business Overdraft Protection Program In Which Banks Work With Customers They Know To Determine How Much To Lend So Businesses Can Cover their expenses.
Like Kling’s idea, Cuba’s program would be backed by the Fed.
“The things you might be spending money on – rent, utilities, basic overhead, salaries, and affiliate wage costs – these things might be overdraft,” Cuban said in a recent report. episode of the “Bank with interest“Promontory Interfinancial Network podcast.
The Pew Charitable Trusts consumer credit team has been studying overdraft issues for years.
Research from the nonprofit shows that traditional overdraft programs that charge a fee – up to $ 35 per overdraft – tend to work like expensive and inefficient credit, especially for customers who use it. to borrow small amounts of money. But the idea of establishing formal rules for banks to offer small lines of credit and small installment loans holds much more promise, according to Alex Horowitz, a senior executive at Pew.
So far, only one major bank in the country – US Bancorp in Minneapolis – offers a small installment loan program, Horowitz said. Customers have three months, not three days, to repay the loan, he said.
More widespread creativity around overdrafts – or at least a framework that details exactly how small dollar loan programs should work – might be on the way. Earlier this month, as the pandemic continued to cripple the economy, a group of regulators issued a joint statement encouraging banks and other lenders to make small loans. The Office of the Comptroller of the Currency released guidance on the subject in 2018, but other agencies – the Fed, Federal Deposit Insurance Corp., National Credit Union Administration, and Consumer Financial Protection Bureau – do not yet have it. fact, and which leaves some banks reluctant to start offering such loans.
“With some guidance from regulators, banks could be more flexible in how they determine who qualifies for a line of credit, whether it’s an overdraft line of credit or a small line of credit. which is not linked to an overdraft, ”said Horowitz. “It’s the same with small installment loans. There is no reason a customer would need a top credit rating to get a $ 400 loan. We’re not talking about lending to people they don’t know. We are talking about lending to people who are their clients.
Castilla said something has to give, especially when federal aid programs like PPP dry up again and some businesses continue to need quick access to small loans.
“I think there is going to have to be something,” Castilla said. “I don’t know what it will look like. “